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Contractors Beware in Signing Lien Waiver and Release

A California case could have a major impact on the construction industry with regard to the way contractors, sub-contractors and material men prepare and sign “progress lien waiver and release” forms in exchange for payment.

In Tesco Controls Inc. v. Monterey Mechanical Co., 2004 DJDAR 14466 (Cal. App. 3rd Dist. Dec. 6, 2004), the court ruled that a waiver and release covered all services and materials provided up to the date stated on the receipt – even if they had not been paid for under the progress payment.

The facts in Tesco are interesting: The City of Chico contracted with defendant Monterey Mechanical to perform work on a wastewater plant. Monterey entered into a sub-contract with Stratton Electric, and Stratton in turn retained plaintiff Tesco Controls to provide certain instruments and controls. Monterey and Stratton entered into a joint checking agreement, and Monterey agreed to pay Tesco by check made out to Tesco & Stratton.

During the project, Stratton issued a check payable to Tesco drawn on its own account but the check never cleared the bank. Thereafter, Tesco gave Monterey a lien waiver and release conditioned on a certain payment (substantially less than the bounced Stratton check), which was thereafter paid by joint check; that lien waiver and release covered labor and materials through January 1999.

In May 1999, Monterey paid Tesco via two checks, with a waiver and release stating Tesco had been paid for all services and materials through end March 1999. When the project was completed, Tesco was still short the amount of the bounced Stratton check. And so Tesco sued Monterey for the money.

The Tesco court analyzed California’s waiver and release requirements. It noted the Legislature had drafted a release that waived mechanic’s lien rights, bond rights, and stop notice rights for services and materials provided up to the date stated on the receipt “even if those services and materials were not compensated by the progress payment.” This ruling would have skewed Tesco Controls (as it had waived all of its rights re services rendered and materials supplied in executing the lien release in March 1999).

However, the court cleverly found a way out for Tesco Controls and held that it was still entitled to sue Monterey for the bounced check from Stratton due to violation of the joint checking agreement.

You might say this was a lucky bounce for Tesco.

The key lesson from this case is that contractors (as well as sub-contractors and material men) may be deemed to have waived all mechanic’s lien, stop notices or bond claims if they execute a conditional or unconditional waiver and release, for progress payments, for a stated period without reserving their rights to any prior claims.

Contractors should be careful not to sign a waiver and release in a later month (say December) where payment for labor or materials supplied in a prior month (say November) has not yet been made, or where extras or specific items were furnished after the date stated in the waiver and release:

First, the contractor should make a written notation as to its “reservation of rights” in the waiver and release as to any late or missing payment. Second, the contractor should make a similar notation on the waiver and release for added costs from project delays and disruptions (e.g. labor inefficiencies), even if they are not yet quantified.

Err on the side of caution; if there is any question, contact legal counsel.

At the very least, the notation and reservation of rights on a waiver and release form would be notice of a claim. And hopefully, it will result in getting the matter resolved and the contractor fully paid.

Case Report written by:
Neil Klein